Goldman Neutral On Lodging; Says Buy Marriott, Sell La Quinta

Demand indicators in the US Lodging industry are decelerating in relation to building supply growth, Goldman Sachs’ Stephen Grambling said in a report. He initiated coverage on the Lodging sector with a Neutral view, citing concerns regarding the sector’s backdrop in the back half of 2016 and in 2017.

“Yet we believe the point of peak underperformance for the group has passed, as estimates have come down and relative valuation sits near historic lows,” analyst Grambling commented. He recommended a pair trade.

Buy Marriott

Grambling initiated coverage of Marriott International Inc MAR with a Buy rating and a 12-month price target of $81. The price target represents 18 percent potential upside and a 1.8 percent dividend yield.

The combination of Marriott with Starwood Hotels & Resorts Worldwide Inc HOT lends upside potential. The acquisition offers Marriott “more levers to drive growth against a decelerating backdrop,” the analyst stated. Estimated synergies of $250 million appear achievable, while there are revenue synergies from both RevPAR improvements and franchisee benefits.

Moreover, the expected proceeds from asset sales of $1.5-$2 billion could prove conservative, Grambling mentioned.

La Quinta

The analyst initiated coverage of La Quinta Holdings Inc LQ with a Sell rating and a 12-month price target of $9. The price target represents 20 percent downside, versus the average 2 percent downside for Lodging.

“In our view, LQ is the company most at risk to the fundamental and structural challenges currently facing the lodging industry which will likely continue to weigh on results,” the Goldman Sachs report noted. The company has merely 12 percent of existing supply in the Lodging sector, while also having a low pipeline, in the most attractive markets.

While La Quinta has a weak digital presence, consumers are increasingly shifting to mobile bookings. The company would need to make more investments in advertising and/or properties in order to remain competitive, Grambling believes.

Do you have ideas for articles/interviews you'd like to see more of on Benzinga? Please email feedback@benzinga.com with your best article ideas. One person will be randomly selected to win a $20 Amazon gift card!